With the recent lawsuit filed by the U.S. Securities and Exchange Commission against a Jackson attorney on three counts of bond fraud, many are asking: How will it impact communities?
Bond fraud can negatively impact investors because the IRS may determine that interest earned on the bonds is taxable. Selling future bonds could be a problem for municipalities, whose credit rating will also be affected, Valli said.
“For example, years from now, the city of Coldwater may decide to issue a legitimate municipal bond to build a school,” Valli said. “Investors may have a memory of Coldwater being involved with some bond fraud and they may be wary of buying the bonds.”
The SEC filed suit against DerrylW. Peden, 46, a Jackson lawyer, claiming he caused 39 counties, cities and towns to lie about how they intended to use bond proceeds. Peden, a licensed attorney since 1974, and a partner at Stennet, Wilkinson & Peden, served as bond counsel on all of the urban renewal revenue note financings, solicited them to issue bonds, and claimed interest paid to investors would be tax-exempt.
SEC has also issued cease-and-desist orders against 38 of the counties and municipalities accountable for 73 bonds, which collected about $283 million. Bonds were issued between November 1987 and May 1996, and ranged from $2 to $5 million, with a total of approximately $287 million.
“Municipal officials and underwriters have a responsibility in the offering statement when the municipality is going to authorize the issuance of bonds,” said Timothy McCole, senior legal counsel for the secretary of state`s office.
“If the municipality needs public funds, it would be appropriate to seek an underwriter,” McCole said. “But it was the reverse in this case. The underwriters were soliciting the municipalities. As a municipal official, I would be cautious if an underwriter pitched a financial plan which involved the sale of bonds.”
Because the secretary of state`s office regulates securities industry in Mississippi, information about credentials and operating history of underwriters is on file.
“If there`s ever a question, municipalities should call our office,” McCole said.
The intention of bond money is for capital projects within a three-year period – such as parks, courthouses, roads — but it is alleged in the suit that Peden knew or was reckless in not knowing that the municipalities did not intend to spend the money as represented in official statements.
“The message we`re trying to get across is that all municipal issuers, no matter how small, are responsible for the representations that are made in the official statements and bond-closing documents,” said Valli.